However, seeing much of the reaction to this piece of work has resulted in some disconcerting observations. Advisers might be thinking that the Retirement Outcomes Review doesn’t impact them as the report is all about non-advised consumers.
This is mostly true but the FCA is quite explicit in the report saying that for advisers they must demonstrate that investment pathways have been considered in pension drawdown suitability reports. This means this will apply every time a client decides to make a new decision to take a fresh chunk from their pension drawdown pot.
We now know, therefore, that the advice market will need to respond to the FCA’s current open consultation on the Retirement Outcomes Review. At the very least it is an area they are going to need to watch closely to ensure they remain compliant.
The FCA’s primary concern is the harm non-advised consumers may come to when enjoying the pensions freedoms, and having a lack of oversight on the state of their pension savings.
Indeed they found a significant number of non-advised clients mostly or solely invested in cash. Clearly, any investor with more than a very short term time horizon will struggle to deliver any reasonable investment return with such a strategy, and will thus run out of money during retirement.
Subsequently, solutions around wake up packs and the prompting of consumers to make more informed decisions are welcome. Advisers ought not to be concerned this is taking away their job, if anything it will heighten consumers’ appetite for advice and should result in new business opportunities.
The Retirement Outcomes paper published last year had already introduced the idea of investment pathways to reflect the different type of journeys a drawdown pot may need to support. This makes good sense. After all, a consumer wanting to draw down the whole pot in less than 5 years is in a very different position to those seeing their pot as a means to deliver a lifelong income or to leave as a legacy.
The regulator has been very sensible in its wording, and has actually written this in plain English:
6.19 ‘Following the consideration set out above, the 4 objectives we propose are’:
- Option 1: I have no plans to touch my money in the next 5 years
- Option 2: I plan to use my money to set up a guaranteed income (annuity) within the next 5 years
- Option 3: I plan to start taking my money as a long‑term income within the next 5 years
- Option 4: I plan to take out all my money within the next 5 years
This shouldn’t come as too much of a surprise. Back in 2015 Rory Percival, then of FCA, outlined that clients would have a very different risk profile in decumulation compared to accumulation.
The advice and investment solution must reflect the specific needs consumers have in decumulation. The risks in decumulation – sequencing risk, pound cost ravaging, volatility drag, longevity and inflation risk – are hopefully now better understood.
However, far too many investment solutions used in accumulation are still routinely used in different pathways in drawdown. That cannot be right and it seems the FCA sees it that way too.
The beginning of the Retirement Outcomes Review says that pensions and retirement income continue to be a priority for the FCA. This suggests we will see more, not less, intervention.
But what exactly are asset managers and advisers doing in response? There certainly has been a lot more debate about decumulation and a little innovation in asset management strategies, but not nearly enough.
I worry when I speak at adviser events that the decumulation risks are not yet widely understood. Until they are the demand for innovation will be slow. As an industry, we should not be waiting for that. Instead, we must drive the innovation and support what our clients need now.
Lawrence Cook is director at Thesis Asset Management